Corruption in Electricity Sector

Mohinder Gulati

Lead Energy Specialist

EASEG

M.Y. Rao

Former Chairman

GRIDCO, Orissa (India)

April 6, 2006

Conclusions

Petty corruption is anything but petty In electricity sector corruption and inefficiency are closely

intertwined Public participation is a key element of ensuring

transparency and accountability Corruption is often pervasive; therefore, struggle to

reduce it would be long and hard; there is no magic bullet Strategy to reduce corruption must include transition

finance There is hope: some success stories

Structure of the Presentation

Section II. Vulnerabilities to

corruption

Section III. Strategy for combating

corruption

Section I. Corruption: A pervasive scourge

Case Studies – AP, India;

Bangladesh

Section I: The Scourge of Corruption

Petty corruption is anything but petty

Corruption cuts across countries and cultures

Corruption and inefficiency are linked to weak governance

The poor bear the brunt of corruption

Petty corruption is anything but petty

Rough estimate for developing countries: Corruption in Capital Expenditure $8 billion per annum; in theft of electricity $33 billion per annum.

A 1000 MW generation plant: Grand larceny $60-80 million (one time); theft of generated electricity @30% $180 million every year.

India: Rough estimate of electricity theft $6-7 billion: may be enough to eliminate supply shortages.

Amounts involved are large enough to drive a utility and sometimes governments to near bankruptcy.

Recurring burden unlike Investment Erodes the work culture of the utility A Major source of harassment of consumers

Poor Bear the Brunt of Corruption

Double whammy for the poor: low access to electricity; power sector subsidies crowd out social sector expenditure- critical for the poor

Bangladesh: light bulbs do not last long due to poor quality supply; low income household may spend as much on electric bulbs as on electricity

Andhra Pradesh (2002): Subsidy/GSDP 1.6% Subsidy US$525 millionSubsidy/Revenue Deficit 80%

Opportunity Cost of Power Subsidy (US$ million)

Cost of providing: Capital Cost Annual Operating Cost

Primary health care for rural areas in the state 260 22Clean drinking water per village 0.25 0.01Primary schools for all rural areas as per government norms 200 200

Section II: Diagnosis, Areas of Vulnerability

Areas Vulnerable to Corruption: Government:

Policies

Utilities: Investment Decisions

Customer interfacing activities

Commercial operations - Theft of electricity

Procurement

Human Resources

Vulnerable Areas: Government Policies

Government Policy Areas Vulnerable to Corruption

Establishment of the need for capacity additionManipulation of estimates of the required capacities (please

see note below)

Norms and procedure for licensingAlteration of norms and licensing criteria to suit particular

interests

Statutory and other clearancesDilatory and repetitive procedures, Authorities with

overlapping jurisdictions. No time limit for final decision.

Sale of the energy generatedStipulations regarding who may buy the energy and the price

payable. Power Purchase Agreements (PPAs)

Acquisition of land and rehabilitation of displaced persons

Payment of compensation to land owners, payment to and resettlement of displaced persons

Subsidies to specified consumer groups Administration of subsidy including selection of beneficiaries

Selection of Regulators and top management of UtilitiesManipulating selection criteria, “sale” of top positions to

highest bidders

NOTE: When the demand is deliberately under-assessed, an opportunity for future shortages is created which will justify “emergency” arrangements to purchase electricity from expensive sources.

Vulnerable Areas: Capital Projects

Project Formulation Project Implementation Project Operation

Techno-economic studies to establish feasibility and viability

Surveys and site investigations

Estimation of costs and timeframes

Statutory and other clearances

Land acquisition for the plant. Right of way for lines

Rehabilitation of persons affected by the project

Procedure for selection of Contractor

Type of contract (works, labor, turnkey etc) and contract documents

Monitoring and supervision of Contractor’s work

Purchase/supply of plant/ machinery/materials

Stage payments to contractors

Completion and commissioning

Performance of plant/machinery etc during initial guarantee stage

Execution of O&M (in-house or out-sourced)

Emergency repairs. Purchase and utilization of

materials, stores and consumables. Emergency purchases.

Payments to contractors, suppliers and vendors

Employee related issues- promotion, transfer, payment of employees’ dues etc

Adherence to relevant codes and licensing conditions

Vulnerable Areas: Customer Interfacing Activities

Activities Causes Beneficiaries of corruption

Meter reading By-passing the meterTampering of meter

Customer, Meter readers, in case of large consumers more senior utility staff.

Payment of bill and correction of bill

Errors in bill Collusion between utility staff and consumer.

Meter readers, commercial staff. In case of large consumers, politicians and senior staff.

New connection/additional load

Information on procedure not available. Harassment by utility staff

Linemen, commercial staff.In case of large loads, politicians and senior staff.

Repairing service, fuse call

Normal wear and tear.Harassment by utility staff

Linemen, electricians, maintenance staff.

Restoring electricity supply after interruption

Disruption of supply caused by accidents.Maintenance work.

Linemen, electricians, maintenance staff.

Meter installation Replacement of defective meter

Harassment by utility staff. Meter tampering.Normal wear and tear.

Meter readers, linemen. Electricians, maintenance staff.

Disconnection Non-payment of bill.Delay in receipt of bill. Pilferage by consumer. Free supply to consumer.

Linemen, electricians, maintenance staff. In case of large consumers, politicians and senior staff.

Reconnection After rectification of cause of disconnection.Harassment by utility staff.

Linemen, electricians, maintenance staff.

Vulnerable Areas: Theft of Electricity

Activities Mode of theft Beneficiaries of corruption

Generation Unauthorized use in the colonies housing the plant staff

Staff of the PlantUnion leaders

Transmission Tapping of overhead transmission lines by large consumers

Large consumersPoliticians BureaucratsUtility managers Transmission line staff

Distribution Tapping distribution lines ConsumersDistribution utility staff

Distribution Organized resistance to pay for electricity Labor union leaders PoliticiansGroups of consumers acting in concert (farmers,

industries, residential colonies etc)

Distribution Non-billing and under-billing of energy Consumers Billing staff

Distribution Tampering with or bypassing meters ConsumersLinemen

Distribution Billing the consumer at a lower rate ConsumersBilling staffUtility managers

Theft of Electricity - Causes

Absence of accountability Weak internal controls: inefficient business

process (no reconciliation: energy received- energy billed-amount collected from customers-amount remitted)

Political protection to employees and influential customers

Inadequate and ineffective enforcement of law Customer attitude: “Immoral to steal from

neighbor but legitimate to steal from the State”

Vulnerable Areas: Human Resources

Recruitment Transfer of staff Senior level appointments No disciplinary action taken for

corruptionA nexus develops between politicians,

bureaucrats, and Utility staff

Vulnerable Areas: Procurement

Ambiguous/biased technical specifications Non-transparent qualification criteria for

bidders Non-competitive process Less transparent evaluation criteria Collusion Negotiation on non-price factors Quality-control Quantity of materials delivered

Section II: Diagnosis

Transparency and access to information are key to good governance

Weak governance and supply shortages create a fertile ground for corruption

Grand larceny gets media attention, but petty corruption causes more damage

Design Variables for an Anti-Corruption Strategy

Governance VariablesPublic GovernanceCivil Society Participation

Institutional and Policy VariablesLegal FrameworkRegulatory InstitutionsCorporate GovernanceHard Budget Constraints for State Owned EnterprisesMarket Structure

Process VariablesTransparencyAccountability

Utility Management VariablesInvestment DecisionsFinancingProcurementHuman ResourcesInternal Controls

Section III: A Strategy for Combating Corruption

Focus on Petty Corruption: “take back the streets” approach

Political commitmentQuality, commitment of senior managersCommunication campaign and political

visibility of actionsCommitment of adequate resourcesNo interference in favor of influential

offenders

Section III: A Strategy for Combating Corruption Improve Utility business processes and use

modern technologySimplify procedures, transparency in application of

proceduresUse of technologyTransparency in procurement processOutsourcing performance-based contracts

Utility management buy-in, employee incentives (rewards and penalties)Protection to honest staffPenalty for collusion with consumerIn addition to labor unions, direct communication with

employees

Institutional mechanism for accountability

(a) Legal and Regulatory Issues

Independent regulatory regime Consumer’s Charter Establish norms and standards Ensure regular audits Support of judicial system

Section III: A Strategy for Combating Corruption

Section III: A Strategy for Combating Corruption

Institutional mechanism for accountability (b) Institutional Arrangements

Engender accountability by regular energy audits

Institutionalize user surveys Customer grievance redressal system Strengthen Integrity Unit Independent Monitoring

Encourage public participationInstitute mechanisms for public participationRight to information enacted and enforced

Role of donorsFocus on improving governance, accountability,

and management of utilitiesCost of implementing necessary measures is not

highReduce political cost of reforms: gradual

approach, empower consumers and civil society, Finance transition costs so that efficiency

improvement and cost-recovery move in tandem

Section III: A Strategy for Combating Corruption